ortgages are the big-gest financial commitment most of us make, but despite this, mortgage lending and advice have been unregulated – until now. The Financial Services Authority (FSA), the City watchdog, last week released details of regulatory proposals that should make mortgages easier to understand and reduce the risk of mis-selling.
Mortgages are the big-gest financial commitment most of us make, but despite this, mortgage lending and advice have been unregulated – until now. The Financial Services Authority (FSA), the City watchdog, last week released details of regulatory proposals that should make mortgages easier to understand and reduce the risk of mis-selling.
A spokesman for the FSA says: "We want to ensure that where consumers are given advice, they receive correct and clear information, and if they are given a recommendation, it's for a suitable product."
Mortgage regulation has been in the pipeline since last summer but the proposals first put forward by the FSA covered only mortgage lending and administration. However, in December the Treasury unexpectedly announced that mortgage advice was to come under the FSA's remit as well. The proposals relating to this area were announced last week, and there will now be a three-month consultation period. Regulation will be formally introduced in 2004.
Excluded from the FSA's proposals are buy-to-let mortgages, home reversion plans – a type of equity release scheme – and second-charge lending, where people take out a second loan that is secured on their home.
"We are pleased that an official timetable has been set," says Mick McAteer, spokesman for the Consumers' Association. "But we're quite disappointed that buy-to-let and reversion plans won't be regulated. Given the concerns over pensions, I think a lot of people are considering these as alternative [ways of funding retirement]."
The Treasury regards buy-to-let mortgages as commercial products, and for this reason they have been left out of the FSA's plans. It has also been argued that those applying for buy-to-let loans are sophisticated consumers who understand the complexities of the mortgage market. But brokers are concerned that this is not always the case.
"Although there are experienced investors in the buy-to-let market, there are also new people coming in all the time," says David Bitner, mortgage technical manager at The MarketPlace at Bradford & Bingley.
Once regulation comes into effect, it won't necessarily mean that those wanting good advice on buy-to-let products won't have access to it. Currently, even though mortgages aren't formally regulated, many lenders and brokers follow a code of conduct and work closely with the Mortgage Code Compliance Board (MCCB).
But problems could arise because the FSA's proposals also include plans for advisers to be qualified to a certain standard. The fear is that advisers who don't meet these standards will concentrate exclusively on buy-to-let mortgages, home reversion plans and second charge lending, which also tend to be the most complex loans.
Home reversion plans, for example, are available only to those over 60 who want to release equity tied up in their homes. This makes them attractive to many pensioners looking for extra income in retirement. But they are difficult to understand, and are often not the best option for those wanting equity release. With reversion plans, you are selling a percentage of your home (and as a sale, this doesn't come under the regulatory remit). A more suitable option for most people is a lifetime mortgage, which is repaid not by monthly repayments, but as a lump sum after your death, when the property has been sold.
"If we recommend a lifetime mortgage, we will have to consider whether a home reversion scheme is more appropriate," says Stephen Tulley, compliance director at mortgage broker Savills Private Finance. "But the reverse is not true. This could create an imbalance in the market to the detriment of consumers. Will we have advisers moving into the home reversion sector to escape regulation?"
Although some aspects of mortgage selling won't come under the FSA's powers, the consensus is that regulation is a good thing for consumers. In addition to mortgages, the regulatory framework will cover home improvement loans, debt consolidation loans and secured credit cards.
"Regulation will be an evolutionary process [and it's pessimis-tic] to focus on what's not included," says David Hollingworth at broker London & Country. "If you look at what is included, you can see it's good news. And further down the line, [buy-to-let, reversion plans and second charge lend-ing] could be included as well."Reuse content